TaxMasters, a Tax-Resolution Firm, Is under Fire in Two States

TaxMasters, a tax-resolution firm that is up to $10 million in debt, is filing for bankruptcy protection following investigations by two attorneys general.

The firm is known for its television commercials in which the red-bearded CEO, Patrick Cox, says TaxMasters can "solve your tax problems." The Texas and Minnesota attorneys general, Greg Abbott and Lori Swanson, sued the firm in 2010 for deceptive trade practices.

In published statements, Abbott and Swanson said the $14 million national marketing campaign persuaded desperate taxpayers to call "former IRS agents," but instead, they were misled by salespeople into paying TaxMasters thousands of dollars up front, but TaxMasters "delivered little or no help." In addition, the company, while claiming to start work immediately, delays any services until it gets all its fees.

TaxMasters has denied the allegations in the lawsuits, and Cox said in a statement to ABC News that the company "prides itself on honest customer service, a transparent process with our customers, and seeking fair treatment from the IRS."

Financial experts have long warned against anyone who claims he or she will settle tax debts for just pennies on the dollar. MarketWatch columnist Ray Martin says distressed taxpayers should learn about an offer in compromise, an agreement with the IRS in which tax liabilities can be settled for less than the full amount.

"Even sending a partial payment on time with a request for a payment plan is better than sending nothing at all," Martin writes. "Doing so will help to reduce penalties for not responding and paying on time."

TaxMasters, a Houston-based company, in its filing in US Bankruptcy Court for the Southern District of Texas, contends it has assets of less than $50,000 and has between 1,000 and 5,000 creditors. Bloomberg reported that three affiliates also filed for bankruptcy, two of which will liquidate under chapter 7 of the US Bankruptcy Code. On March 20, ABC News reported that the publicly traded company hit a low of 1 cent.

Securities and Exchange Commission filings now carry a warning that the company's earlier financial statements are being amended and should no longer be considered reliable, ABC News reported.